Economics: Sunk Costs and Utility

1. People join tennis clubs for a fixed fee per year, which entitles them to play as much as they want without charge. Because people who pay these fees play more tennis than others (who can use free public courts), this means sunk costs matter for decisions. True or False?

2. When discussing the maximization of utility, regardless of whether you chose to work more hours or fewer when offered a higher hourly wage, you could not be worse off than you were at a lower hourly wage. Explain.

Solution Preview

Question one:

Sunk costs are costs which have already been incurred and cannot be recovered at any instance. These costs differ from any other costs that a business may incur in future such as research and development expenses or inventory costs because they are costs which have already been incurred. These costs are independent of any event which may occur at a future date. Individuals or business organizations always take into consideration future costs which are likely to be incurred through following an identified strategy.

A fixed fee, similar to a flat rate is a cost which remains constant with the increase or decrease in the amount goods and services which are produced. This means that the expenses which are associated to the fixed costs have to be paid by a company while the activity that the business is involved in remains to be independent. Sunk costs are not considered as relevant during the act of making decisions. 'sunk cost fallacy' is a situation whereby an individual ...

Solution Summary

This solution discusses the questions regarding sunk costs and utility in 645 words. Two references are provided.

$2.19

See Also This Related BrainMass Solution

Managerial Economics: Consulting, Forecasts, and Competition

Need help with these nightmare questions. The response to each question must be in one decent paragraph. Thanks and I appreciate your help in advance.

1. A manager makes the statement that output should be expanded so long as average revenue exceeds average cost. What does this mean, and does this strategy make sense? How would you explain it?
2. As an economic consultant to the dominant firm in a particular market, you have discovered that, at the current price and output, demand for your client's product is price inelastic. What advice regarding pricing would you give and why?
3. Managers depend on economic forecasts in making decisions. Recognizing that a margin of error is as important as the forecast itself, disasters in the planning process could occur if management is over confident in predictions and projections for the future. Provide an industry example of this and explain how it could have been avoided.
4. Opportunity cost is associated with choosing a particular decision that is measured by the forgone benefits of the next-best alternative. What example would you pose to explain this? What is meant by a sunk cost?
5. Consider the concept of perfect competition. This is where the firm faces infinitely elastic demand. How is this best explained? Provide an example.
6. Monopolistic competition is described with the following formula: MR=MC and P=AC. Explain this by providing an industry example.
7. Sequential competition is described as where the manager must think ahead. What strategies do you recommend for anticipating the actions of competitors and why?
8. An externality is described as an impact or side effect that is caused by one economic agent and incurred by another agent or agents. How is this best explained? What industry example do you use to demonstrate this?